JG/Indonesian Government Plans New Tax Incentives to Lure Investors

Jakarta. The government plans to expand a tax incentives program for foreign investors to include additional downstream and “pioneering” sectors, as well as offer sweeteners for companies that invest more than $1 billion and create a certain number of jobs, the country’s investment chief said late on Monday.

Gita Wirjawan, head of the Investment Coordinating Board (BKPM), said the revisions would begin as soon as the end of this month, but “would take quite a long time.” He described “pioneering” industries as sectors that did not yet exist in Indonesia.

The current regulation already provides tax breaks to oil refineries, steel makers and producers of geothermal energy, among others.

It allows for companies to deduct 30 percent of their initial investment from their taxable income over six years, with a maximum of 5 percent a year. It also allows for faster amortization and depreciation of assets, reducing the amount of taxable income.

Gita said tire manufacturing would be included in the revisions, which would benefit Seoul-based Hankook Tire. Last month, he said Hankook had committed $1.2 billion for a manufacturing plant in Indonesia.

“The tire industry was not included in the [existing] regulation, while we have this tire company wanting to enter Indonesia,” Gita said on Tuesday.

In addition, the government is also preparing a regulation that would grant incentives for companies that invest more than $1 billion - or “slightly less if the investment is in eastern Indonesia” - and create a labor force of at least 3,000 people, Gita said.

Finance Minister Agus Martowardojo said on Monday that the government was working to make room in the state budget to accommodate the incentives.

However, Deputy Finance Minister Anny Rahmawati said every Rp 1 trillion ($111 million) in tax breaks to corporations required the government to find an additional Rp 200 billion for education.

“By law, 20 percent of the state budget has to go for education. In case of tax incentives it looks like the government gets additional income, but actually the government does not,” she said.

The state is seeking billions of dollars in foreign investment to help it achieve the president’s target of 7.7 percent GDP growth by 2014.

Purbaya Yudhi Sadewa, an economist at the Danareksa Research Institute, welcomed the tax-incentive plan. “As long as they give incentives for downstream industries, which create more value for us, the incentives would do great,” he said.

“The incentives should encourage new industries such as high-tech,” he added.

“The incentives for new industries would not burden state budget. But incentives such as tax allowance for existing industries would, so the government should select the industries that have large multiplier effects.”